NJ Tax Audit Times
Start Circling The Wagons!
Now what? You're about to unwillingly board a potentially disastrous roller coaster ride. Unfortunately, you're not on a planned vacation in Disneyland and about to enter the Space Mountain coaster ride. This rather unexpected event, which is now front and center, may not have been anticipated nor adequately planned for!
While it's certainly possible that you may escape the audit engagement unscathed, it's less likely today than in the past as state taxing agencies are, absolutely, more aggressive now than ever before. Unless you have the intellect of a card-carring Rocket Scientist, just attempting to fully understand all of New Jersey's dynamic, confusing, and nuanced tax statutes & regulations is, at a minimum, very time consuming and in some cases, very confusing.
For example, lets say your firm has decided to purchase each of your 1,000 employees access to MS Office software at an annual cost of $100 per user, and this software is used strictly for business. Upon completing the purchase, your software vendor then electronically delivers the software, via a download to your server. Upon receipt of the software, your IT Director delivers access to the MS Office software to each of your employee's 1,000 workstations. Not unlike many other states, NJ has a sales tax exemption for downloaded software. Accordingly, you consider this $100,000 purchase of the downloaded software to be exempt from NJ Sales and Use Tax (S&UT). However, should the software vendor (1) provide even one copy (master copy) to the IT Director or (2) instead of downloading the software, physically load the CD / DVD program (tangible storage media) onto your server and leave, the entire transaction would then become subject to NJ Sales and Use Tax! Oops, there goes about $7K (or 28K if extrapolated) plus penalty & interest upon audit!
Assuming your firm has not recently performed a NJ S&UT compliance review, now would be the best time to meet with the appropriate members of your team, stakeholders, as well as your outside accountants to develop a reasonable plan to combat the upcoming audit. A mini compliance review, including the analysis of the firm's S&UT policies, procedures and actual practices should be one of the first items on the list. Additionally, a discussion and determination should be made regarding whether, or not, to seek professional advice from a NJ Sales & Use Tax Specialist as how to best plan for and deal with the audit, along with all of its associated details and procedures.
Software Comment: Be very careful with regard to New Jersey's downloaded software exemption. For example, why would a software vendor's invoice contain shipping charges if the software was exclusively downloaded with no tangible storage media provided? While the answer may simply be that the vendor shipped you a software manual or some other type of document, the state auditor may believe, unless proven otherwise, that a master DVD or CD was included as a part of this transaction and accordingly, assess your company a tax liability plus penalty and interest.
Best Practices: When negotiating for the purchase of downloaded software, have the vendor explicitely state on the purchase invoice/contract that the software is being delivered exclusively via an electronic download only and that no tangible storage media will be provided. Additionally, print or screen shot the email that contains the software's key codes and associated information and retain all documenttion with the software's purchase invoice/contract. Please note that, if/when renewing the software contract via a subsequent license agreement, perform the same procedures/prectices as listed above.
While it's certainly possible that you may escape the audit engagement unscathed, it's less likely today than in the past as state taxing agencies are, absolutely, more aggressive now than ever before. Unless you have the intellect of a card-carring Rocket Scientist, just attempting to fully understand all of New Jersey's dynamic, confusing, and nuanced tax statutes & regulations is, at a minimum, very time consuming and in some cases, very confusing.
For example, lets say your firm has decided to purchase each of your 1,000 employees access to MS Office software at an annual cost of $100 per user, and this software is used strictly for business. Upon completing the purchase, your software vendor then electronically delivers the software, via a download to your server. Upon receipt of the software, your IT Director delivers access to the MS Office software to each of your employee's 1,000 workstations. Not unlike many other states, NJ has a sales tax exemption for downloaded software. Accordingly, you consider this $100,000 purchase of the downloaded software to be exempt from NJ Sales and Use Tax (S&UT). However, should the software vendor (1) provide even one copy (master copy) to the IT Director or (2) instead of downloading the software, physically load the CD / DVD program (tangible storage media) onto your server and leave, the entire transaction would then become subject to NJ Sales and Use Tax! Oops, there goes about $7K (or 28K if extrapolated) plus penalty & interest upon audit!
Assuming your firm has not recently performed a NJ S&UT compliance review, now would be the best time to meet with the appropriate members of your team, stakeholders, as well as your outside accountants to develop a reasonable plan to combat the upcoming audit. A mini compliance review, including the analysis of the firm's S&UT policies, procedures and actual practices should be one of the first items on the list. Additionally, a discussion and determination should be made regarding whether, or not, to seek professional advice from a NJ Sales & Use Tax Specialist as how to best plan for and deal with the audit, along with all of its associated details and procedures.
Software Comment: Be very careful with regard to New Jersey's downloaded software exemption. For example, why would a software vendor's invoice contain shipping charges if the software was exclusively downloaded with no tangible storage media provided? While the answer may simply be that the vendor shipped you a software manual or some other type of document, the state auditor may believe, unless proven otherwise, that a master DVD or CD was included as a part of this transaction and accordingly, assess your company a tax liability plus penalty and interest.
Best Practices: When negotiating for the purchase of downloaded software, have the vendor explicitely state on the purchase invoice/contract that the software is being delivered exclusively via an electronic download only and that no tangible storage media will be provided. Additionally, print or screen shot the email that contains the software's key codes and associated information and retain all documenttion with the software's purchase invoice/contract. Please note that, if/when renewing the software contract via a subsequent license agreement, perform the same procedures/prectices as listed above.
Now What! Please read issue #4: Preparing for a NJ Division of Taxation Business Tax Audit
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